Estate Planning After the TCJA: What Changed for Life Insurance

What the TCJA Actually Did to Estate Taxes

Signed in December 2017, the Tax Cuts and Jobs Act made one headline change to wealth transfer taxation: it doubled the basic exclusion amount — the estate tax exemption — beginning January 1, 2018. The exemption jumped from $5.49 million per person in 2017 to $11.18 million in 2018, then continued rising with inflation, reaching $13.99 million per person by 2025. The gift tax and generation-skipping transfer tax exemptions moved in lockstep, and the top rate stayed at 40%.

Several things the TCJA did not change matter just as much:

• Portability survived. A surviving spouse can still inherit a deceased spouse’s unused exemption by election, effectively doubling a couple’s shelter.
• The step-up in basis survived. Appreciated assets still receive a fresh income tax basis at death, which shifted planning attention from estate tax avoidance toward basis management.
• The rules for including life insurance in the estate survived. A death benefit is still counted in the insured’s taxable estate whenever the insured holds incidents of ownership — which is why irrevocable trusts owned so many large policies in the first place.

The doubling was originally temporary, scheduled to sunset after 2025 — a deadline that dominated planning for seven years before Congress ultimately repealed it, as covered in our companion article on the federal estate tax exemption in 2025. But even before that resolution, the TCJA had already redrawn the map: overnight, a couple could shield more than $22 million, and the population of estates with a genuine federal estate tax problem shrank dramatically.

Why Life Insurance Sat at the Center of Pre-TCJA Planning

To understand what the TCJA disrupted, it helps to remember what the classic plan looked like. Estate tax is due in cash, generally nine months after death. For families whose wealth sat in illiquid assets — a business, commercial real estate, a farm — the tax bill threatened a forced sale at the worst possible moment. Life insurance solved the liquidity problem: a death benefit arrives at exactly the moment the tax is due, in exactly the form the IRS accepts.

The standard architecture had three parts:

• A permanent policy — universal life, whole life, or a second-to-die survivorship policy insuring both spouses, since the marital deduction usually deferred the tax until the second death.
• An irrevocable life insurance trust (ILIT) as owner and beneficiary, keeping the death benefit out of both spouses’ taxable estates.
• Annual exclusion gifts from the insureds to the trust, with Crummey withdrawal notices to beneficiaries, funding the premiums each year.

This machinery was built when exemptions were $600,000, then $1 million, then $3.5 million. A family with a $10 million business faced a seven-figure tax bill and bought seven figures of coverage to meet it. Advisers sold these policies by the tens of thousands, and they were sensible purchases under the law that existed at the time. The trust wrapper, the gifting ritual, and the premium commitment all assumed one thing: that the estate tax would be waiting at the end. After 2018, for most of these families, it wasn’t. The full mechanics of the structure are explained in our ILIT guide.

The Orphaned Policy Problem

The TCJA’s doubling created what planners informally call orphaned policies: coverage that is still legally in force, still consuming premiums, but no longer connected to the problem it was bought to solve. Consider a couple who set up an ILIT in 2006 holding a $4 million survivorship policy against a projected estate tax on their $9 million estate. After 2018 their exposure was zero — yet the trust kept requesting $60,000 in annual gifts, the trustee kept sending Crummey notices, and the policy kept aging.

Orphaned policies create three distinct risks:

• Silent premium drag. Families continue funding out of habit or fear, diverting money that could support retirement income, long-term care reserves, or lifetime gifts to children.
• Silent lapse. The opposite failure: the family stops gifting, the trustee stops paying, and a policy with genuine secondary-market value quietly lapses for nothing. Older universal life policies with thin cash value are especially prone to this.
• Unexamined trusts. The ILIT itself may now be an administrative burden with no tax mission, raising questions about whether to continue, modify, or wind it down.

The right response is almost never automatic surrender or automatic continuation. It is a documented re-evaluation: what is this policy worth kept, surrendered, exchanged, or sold, and what does the family actually need now? That evaluation framework — specific to trust-owned coverage in the post-TCJA environment — is developed at length in our guide to ILITs in a post-TCJA world.

The TCJA Change Nobody Talks About: A Better Deal for Sellers

Buried in the TCJA is a provision that directly benefits policyholders who decide to sell an unneeded policy. Before 2017, IRS Revenue Ruling 2009-13 required a seller in a life settlement to reduce their tax basis by the cumulative “cost of insurance” charges inside the policy. In plain terms: even though you had paid, say, $200,000 in premiums, you could not count all $200,000 as your investment when calculating gain on a sale. The rule was widely criticized as both punitive and practically unworkable, since carriers rarely disclosed cost-of-insurance history.

The TCJA fixed it. For sales after August 25, 2009, the law provides that basis is not reduced by mortality or other insurance charges. A seller’s investment in the contract is essentially the premiums paid, which means less of the sale price is treated as taxable gain.

The rest of the framework still applies in three tiers: proceeds up to basis come back tax-free; the slice between basis and the policy’s cash surrender value is ordinary income; anything above cash surrender value is capital gain. Viatical settlements for terminally ill insureds — generally a life expectancy under 24 months — remain a separate category and are often received income-tax-free. The result is that the after-tax economics of selling improved at the same moment the TCJA made far more policies candidates for sale. Worked examples of the three-tier math appear in our life settlement tax treatment guide.

Planning Element	Before the TCJA (through 2017)	After the TCJA (2018 onward)
Estate tax exemption	$5.49 million per person (2017)	$11.18 million in 2018, rising to $13.99 million by 2025; set at a permanent $15 million from 2026
Top estate tax rate	40%	40% (unchanged)
Typical role of large life insurance	Core liquidity source to pay estate tax at death	Often orphaned; retained only where a non-tax purpose remains
ILIT mission	Keep death benefit out of the taxable estate	Tax mission gone for most grantors; non-tax benefits (control, creditor protection) remain
Seller’s basis in a life settlement	Reduced by cost-of-insurance charges under Rev. Rul. 2009-13	Full premium basis restored by the TCJA; less taxable gain on sale
Dominant planning question	How do we fund the estate tax bill?	What should happen to policies and trusts built for a tax that no longer applies?

The Trustee’s Dilemma: Fiduciary Duty Meets a Purposeless Policy

For individually owned policies, the post-TCJA decision belongs to the owner. For the enormous stock of trust-owned coverage, it belongs to a fiduciary — and that changes the standard of care. A trustee holding a policy that no longer serves the trust’s purpose cannot simply do nothing; prudent administration requires monitoring trust assets and managing them for the beneficiaries’ benefit.

In practice, the post-TCJA trustee checklist looks like this:

• Reread the instrument. Does the trust permit selling or surrendering the policy? Does it state a purpose beyond estate tax liquidity?
• Order an in-force illustration. Many older universal life policies are underfunded and headed for lapse on their current trajectory — a fact trustees are expected to discover before it happens, not after.
• Price every exit. Compare the carrier’s surrender value against the policy’s potential secondary-market value. The U.S. Government Accountability Office found that policy sellers consistently received more than cash surrender value — historically around four to eight times as much (GAO-10-775) — which makes surrendering a marketable policy without checking the alternative difficult to defend.
• Document the decision. Whether the trust keeps, surrenders, or sells, a written record of the analysis protects the trustee from second-guessing by beneficiaries.

None of this means selling is the default. It means evaluating is the default. Trustees will find the process, the licensing questions, and the documentation standards laid out in our dedicated guide to life settlements for trustees.

Repurposing a Policy Instead of Abandoning It

Between “keep paying forever” and “get rid of it” lies a middle band of options that post-TCJA planning too often skips. A policy is a bundle of value — cash surrender value, secondary-market value, and contractual flexibility — and each component can be redirected:

• Reduce the face amount. Cutting a $2 million policy to $750,000 can slash premiums while preserving a meaningful legacy, useful when heirs would still welcome a benefit but the estate tax rationale is gone.
• Use a reduced paid-up option. Whole life owners can often stop premiums entirely in exchange for a smaller, fully paid death benefit.
• Execute a 1035 exchange. Cash value can move tax-free into a new policy with long-term care benefits or into an annuity for retirement income — redeploying the asset toward the risks a 75-year-old actually faces. The mechanics and pitfalls are detailed in our step-by-step 1035 exchange guide.
• Draw on the policy itself. Loans and withdrawals against cash value can supplement retirement income, though they reduce the death benefit and require careful management to avoid lapse.
• Sell in a life settlement. For insureds generally 65 and older with policies of $100,000 or more, when offers are made they typically run 10% to 35% of face value, and the process takes roughly 60 to 120 days.

The discipline is to price the options against each other rather than defaulting to the most familiar one. Surrender is fast; it is also frequently the smallest number on the list for an older insured whose health has changed since issue.

From Sunset Anxiety to Permanence: The 2025 Epilogue

The TCJA’s estate tax story had a scheduled cliffhanger. The doubled exemption was written to expire after December 31, 2025, reverting to a $5 million base indexed for inflation — roughly $7 million per person. That looming sunset shaped nearly a decade of planning behavior: families raced to make large lifetime gifts before the window closed, advisers built “use it or lose it” strategies around 2025, and many policyholders were counseled to keep otherwise-unneeded coverage in force as insurance against the exemption falling.

The cliffhanger resolved in July 2025, when the budget reconciliation law known as the One Big Beautiful Bill Act repealed the sunset and set the exemption at $15 million per individual beginning in 2026, indexed thereafter, with no expiration date. For estate planning, the practical meaning is twofold. First, the hedge argument for retaining oversized policies — “what if the exemption snaps back?” — lost its foundation. Second, permanence invites a calmer, more deliberate review than the deadline-driven scramble of 2024 and 2025.

A note of realism belongs here: “permanent” in tax law means only that no expiration is scheduled. A future Congress can raise, lower, or restructure the estate tax at any time, and prudent plans retain flexibility rather than assuming the current regime is eternal. But planning against the law as written, a couple now expects roughly $30 million of combined shelter. The policies and trusts built for a $1 million or $5 million exemption world deserve a fresh look under the framework described in our overview of the role of life settlements in estate tax planning.

A Post-TCJA Review Checklist for Policyholders and Advisers

Pulling the threads together, here is a practical sequence for anyone holding — or advising on — life insurance purchased in the pre-TCJA era:

• Restate the policy’s purpose in one sentence. If the honest answer is “to pay estate taxes we no longer expect to owe,” the policy needs a new job or an exit plan.
• Verify the policy’s health. Order an in-force illustration at current funding. Underfunded universal life can be years from an unplanned lapse.
• Check ownership and trust documents. Confirm who can act, whether the ILIT permits a sale or distribution, and whether continuing annual gifts still makes sense.
• Quantify all five exits — keep, reduce, exchange, surrender, sell — with real numbers, not assumptions. For a potential sale, remember eligibility is generally age 65 or older, face value of $100,000 or more, and a policy in force at least two years.
• Model the taxes. Apply the post-TCJA basis rule and three-tier treatment to any sale scenario, and involve a tax professional before signing anything.
• Use only licensed parties. Life settlements are regulated state by state; in New Jersey, brokers and providers must be licensed with the Department of Banking and Insurance, and any policyholder can verify a license before sharing medical or policy information.
• Mind the downsides. Selling means beneficiaries lose the death benefit, proceeds may be taxable, a lump sum can affect means-tested benefits, and the decision becomes final once the state rescission window — generally 15 to 30 days — closes.

The TCJA didn’t make life insurance obsolete; it made unexamined life insurance expensive. The families who come out ahead are the ones who treat each legacy policy as an asset to be managed rather than a relic to be ignored.

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Frequently Asked Questions

What did the Tax Cuts and Jobs Act change about estate planning?

The TCJA doubled the federal estate, gift, and generation-skipping transfer tax exemptions beginning in 2018, taking the estate exemption from $5.49 million per person in 2017 to $11.18 million in 2018, with inflation adjustments reaching $13.99 million by 2025. The 40% top rate, portability between spouses, and the step-up in basis were all left intact. The doubling was scheduled to expire after 2025, but 2025 legislation repealed the sunset and set a permanent $15 million exemption starting in 2026. The practical effect was to remove federal estate tax exposure for the vast majority of households.

How did the TCJA affect life insurance held in an ILIT?

It removed the tax rationale for much of it. ILITs exist mainly to keep a death benefit out of the insured’s taxable estate, which mattered enormously when exemptions were $1 million to $5 million. With the exemption above $11 million per person after 2018 — and $15 million permanently from 2026 — most grantors no longer face the estate tax the trust was built to fund. The trusts and policies remain legally valid, and non-tax benefits like creditor protection and spending control persist, but trustees and families should re-evaluate whether continuing premium gifts still serves the beneficiaries.

Did the TCJA change the taxes on selling a life insurance policy?

Yes, in the seller’s favor. Under IRS Revenue Ruling 2009-13, a policy seller previously had to reduce their basis by the internal cost-of-insurance charges, inflating the taxable gain. The TCJA eliminated that basis reduction retroactively for sales after August 25, 2009, so a seller’s basis is essentially total premiums paid. The three-tier framework still applies: proceeds up to basis are tax-free, the amount from basis up to cash surrender value is ordinary income, and anything above cash surrender value is capital gain. Viatical settlements for terminally ill insureds are generally income-tax-free.

Should I terminate my ILIT now that the exemption is so high?

Not automatically. An ILIT can still deliver creditor protection, professional management of proceeds, protection in a beneficiary’s divorce, and structure for multi-generational transfers, and terminating an irrevocable trust involves legal steps that vary by state. The better sequence is to evaluate the policy inside the trust first: is it performing, is it still needed, and what is it worth kept versus surrendered versus sold? Once the policy decision is made, counsel can advise whether the trust should continue with a new purpose, be modified, or be wound down. Trustee fiduciary duties apply throughout.

Do I still need life insurance for estate taxes after the TCJA?

Only a small minority of families do. With a $13.99 million per-person exemption in 2025 and a permanent $15 million exemption from 2026, a married couple can shield roughly $30 million, so federal estate tax liquidity is now a concern mainly for very large estates, closely held businesses, and illiquid holdings above those levels. State-level estate or inheritance taxes can still create smaller exposures in some states. Life insurance retains plenty of other jobs — income replacement, business buy-sell funding, inheritance equalization, and charitable plans — but the pure estate tax rationale has disappeared for most households.

What is an orphaned life insurance policy?

It is planners’ shorthand for a policy that remains in force but has lost the purpose it was purchased for — most commonly coverage bought to pay federal estate taxes before the TCJA doubled the exemption in 2018. Orphaned policies create two opposite risks: families keep paying substantial premiums out of habit for protection they no longer need, or they quietly stop paying and let a policy with real secondary-market value lapse for nothing. The remedy is a documented review that prices every option — keeping, reducing, exchanging, surrendering, or selling — before any money moves.

Can a trustee sell a life insurance policy owned by a trust?

Generally yes, if the trust instrument permits it and the sale serves the beneficiaries’ interests, though state law and the document control. Because a policy is trust property, the trustee owes fiduciary duties in deciding its fate: monitoring performance, comparing surrender value against potential settlement value, and documenting the reasoning. Government Accountability Office research found sellers historically received several times cash surrender value, so surrendering a marketable policy without evaluating a sale can be hard to defend — as can selling without competitive offers. Trustees should use licensed brokers and providers and involve counsel throughout.

What happened when the TCJA estate tax provisions were set to expire in 2025?

The scheduled sunset would have cut the exemption roughly in half on January 1, 2026, to about $7 million per person, and for years planners built gifting strategies around that deadline. It never took effect. The budget reconciliation law enacted in July 2025 repealed the sunset and instead fixed the exemption at $15 million per individual beginning in 2026, indexed for inflation, with no expiration date. That resolution removed the last major argument for holding unneeded policies as a hedge against a falling exemption, making 2025-era policy reviews simpler and less deadline-driven.

Related Reading

• Federal Estate Tax Exemption 2025
• Ilit Surrender Vs Settlement
• Estate Planning Life Insurance Guide
• Irrevocable Life Insurance Trust Explained

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Pine Lake Life Solutions does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.